Louisiana legacy lawsuits create unknown risks for some E&P companies

July 11, 2013
Louisiana "legacy litigation" involves hundreds of lawsuits claiming environmental harm caused by oil and gas exploration and production activities. For landowners, these lawsuits have been likened to winning the lottery.

Adam B. Zuckerman, Baker Donelson, New Orleans

Louisiana "legacy litigation" involves hundreds of lawsuits claiming environmental harm caused by oil and gas exploration and production activities. For landowners, these lawsuits have been likened to winning the lottery. In some instances, plaintiffs have sought hundreds of millions or, even billions, of dollars in damages when their property is valued at a fraction of those amounts. They generally posit that the property should be restored beyond regulatory standards to its "original" condition. Oftentimes, the cost of original condition restoration is exponentially higher than restoration to regulatory standards, and landowners aver they get to pocket the difference. Moreover, they argue that the market value of the property is irrelevant to the cost of the restoration.

For oil and gas companies, "legacy litigation" often represents a potential substantial liability that, until they are served with a lawsuit, was previously unknown. This is, in part, because the lawsuits often allege successor liability for operations that occurred decades ago by predecessors. Moreover, the assets at issue were often divested years prior to the litigation, leaving an oil and gas company uncertain as to the activity that took place on an oil and gas lease after it was sold or assigned. Compounding the problem for oil and gas companies, and consistent with historic industry practice, operators likely will have transferred their operational files to subsequent operators, further creating a gap in knowledge about pertinent operations.

Historically, oil and gas companies have attempted to mitigate risk, in part, by including various defense and indemnify provisions in an asset purchase agreements or other transfer documents. In legacy lawsuits, defense and indemnity provisions can be enforceable; however, regardless of how ironclad they seem, such provisions may end up being of little value because of the financial status of the buyer years after the deal is closed, or because the parties to the agreements litigate their meaning until the bitter end, creating a great deal of uncertainty when headed into a trial where a plaintiff is seeking substantial sums.

More recently, some oil and gas companies have begun mitigating risk by creating site specific trust accounts (SSTAs) when divesting property. SSTAs are authorized pursuant to the Louisiana Oilfield Site Restoration Law, La.R.S. 30:88. In sum, SSTAs are a statutory mechanism by which oil and gas properties being transferred are inspected by State-approved contractors prior to the transfer. The purpose of the inspection is "to determine the site restoration requirements existing at the time of the transfer." La.R.S. 30:88(B). Based upon the site restoration requirements, a funding proposal is reviewed, and, if satisfactory, approved by the Louisiana Department of Natural Resources (the "DNR"), Office of Conservation. La.R.S. 30:88(D). Funding of the site-specific trust account includes a contribution to the account at the time of transfer. La.R.S. 30:88(C). Importantly, after the SSTA is funded, "[t]he party acquiring the oilfield site shall thereafter be the responsible party for the purposes of this Part." La.R.S. 30:88(F). Thus, to the extent permitted under the law, once established and fully funded, an SSTA will generally release a transferor and prior responsible parties for regulatory liability for site restoration costs, and make the transferee the responsible party in the eyes of regulators. Landowners, however, generally argue that, regardless of whether an SSTA was created, oil and gas companies remain liable for their leasehold obligations, which they aver include restoration to original condition.

The scope of potential liabilities discussed above were not necessarily readily apparent in Louisiana until at least 2003, when the Louisiana Supreme Court handed down its ruling in Corbello v. Iowa Production, 850 So. 2d 686 (La. 2003). In Corbello, landowners were permitted to recover substantial damages for remediation that were not tethered to the value of the land, and were not required to use the damages to actually restore the property. Id. Legacy litigation increased significantly after the Corbello decision, with hundreds of such suits now pending.

In 2006, the Louisiana legislature responded to Corbello, and enacted "legacy legislation" commonly known as "Act 312." See M.J. Farms, Ltd. v. Exxon Mobil Corp., 998 So. 2d 16, 36 (La. 2008); see La. R.S. 30:29. Act 312, in practice, provided little relief to the oil and gas industry. Among other things, Act 312 did not streamline litigation or expressly curtail the amount of damages a plaintiff could recover for environmental damage, and it has been interpreted to allow a trial before the DNR can opine on an appropriate standard of remediation.

In 2012, additional legislation was enacted that purports to resolve some of the issues not resolved by Act 312. One of the more significant changes to Act 312 opens the door to DNR involvement in creating a remediation plan before the parties go to trial if limited admissions of liability for all or part of the environmental damage at issue are made. In such cases, the matter should be referred to the DNR to determine an appropriate remediation plan. Each party that files a limited admission is responsible for certain costs incurred by the DNR. A minimum $100,000 deposit is required by an admitting party.

Ostensibly, a DNR-approved remediation plan coupled with evidence of the cost to implement the plan could help a finder of fact determine an appropriate measure of damages, assuming liability. However, a judge or jury may be deprived of this information unless the parties admit regulatory liability, which admission plaintiffs may attempt to use at trial to argue liability for exponentially greater damages to restore property to its "original condition." Moreover, even after the 2012 amendments to Act 312, the landowners' position generally remains that a trial should proceed simultaneously with the DNR proceedings, potentially creating a rush to verdict without the benefit of the DNR's recommendation for remediation.

In a closely watched decision, on January 30, 2013, the Louisiana Supreme Court issued its opinion in State of Louisiana, et al. v. The Louisiana Land & Exploration Co., et al., 2012-0884 (La. Jan. 30, 2013); 2013 WL 360329, interpreting Act 312 on the issue of a landowner's right to be awarded damages beyond the cost of the regulatory remediation plan. The Court affirmed the appellate court's ruling denying partial summary judgment to the defendants, who argued that plaintiffs had no right to seek remediation damages in excess of those found necessary to fund the plan for remediation mandated by Act 312 absent an express provision in the lease. Finding that the statute was procedural in nature and did not affect the substantive rights of landowners, the Court concluded that, by its clear language, Act 312 allowed recovery of damages by a landowner in excess of the cost of the approved feasible remediation plan. It remains to be seen if there will be a significant increase in legacy litigation following this ruling.

In sum, legacy lawsuits continue to remain a potentially substantial liability for companies that own or previously owned or operated oil and gas assets in Louisiana.

About the author

Adam Zuckerman is a shareholder at Baker Donelson. He represents clients in a variety of commercial litigation matters, including contract and business tort litigation, oil and gas litigation, environmental litigation arising out of oil and gas exploration and production activities, natural gas pipeline expropriation proceedings, and construction litigation. He represents creditors in bankruptcy and other collection proceedings, and represents clients throughout the federal and state appellate process. Zuckerman served as Bankruptcy Law Clerk to the United States Trustee for the Eastern District of Louisiana, and also served as Judicial Law Clerk to Chief Justice Pascal F. Calogero, Louisiana Supreme Court. He earned a BS from the University of Georgia and earned his JD from Loyola University School of Law.